December 1 (SeeNews) - Standard & Poor's (S&P) Global Ratings said it has affirmed its issuer and issue ratings on Turkey's Mersin International Port at 'BB-', with a stable outlook.
The stable outlook reflects the outlook on Turkey and the expectations of credit ratios to correspond with the rating and the maintenance of adequate liquidity in the next 12 months despite the impact of Covid-19, S&P said in a statement last week.
The global ratings agency also said in the statement:
"COVID-19 will likely affect MIP less so than other port operators. This year has been challenging for ports as the pandemic and lockdown measures caused supply-chain disruptions and demand contraction in Europe and globally. Although the magnitude of the pandemic's impact is still highly uncertain, we estimate a decline of up to 10%-15% in container volumes for the global port sector in 2020 before they recover thereafter.
However, MIP's containers volumes have been more resilient amid the pandemic thanks to Turkey's favorable export performance in 2020. During first nine months, container volumes (about 80% of revenues) remained relatively flat compared to the same period of 2019 and we expect this trend to continue for the full year. The conventional segment has been volatile, and more difficult to predict. During the first nine months, volumes declined by 3.2% on last year and we expect this trend will continue for the full year with a decline of up to 7.0% from 2019. We think a slow economic rebound as lockdown measures are gradually lifted could help the port's performance in 2021 and that a modest recovery is only possible from 2021 for all segments in which it operates.
We now foresee a slight delay to improvements in MIP's operating and financial positions. We now forecast S&P Global Ratings-adjusted EBITDA to decline slightly to about $215 million-$220 million in 2020, from $226.3 million in 2019, and from our earlier expectation of $230 million-$235 million for this year.
MIP's significant financial flexibility is a key factor offsetting its weaker credit metrics. We forecast that its credit metrics will deteriorate, even without the pandemic, mainly because of the additional leverage it will take on to complete the second phase of the Easter Mediterranean Hub (EMH) expansion (about $250 million for 2021-2023) and shareholder-friendly distributions of about $575 million (also for 2021-2023). Under our base case, we anticipate our weighted average funds from operations (FFO) to debt and debt to EBITDA to dip temporarily to 30%-35% and 3.0x-2.5x, in 2020-2022, from 53% and 1.4x in 2019. Despite weaker credit metrics, these are still commensurate with its 'bbb-' SACP.
Nevertheless, we understand that MIP is committed to maintaining its liquidity position and delivering a net ratio of adjusted debt to EBITDA no higher than 3x. While we have not factored in any offsetting measures at present, the majority shareholder--PSA International (51% shares)--has the flexibility to cancel or postpone its dividend or upstream loans, which are discretionary by nature. We also believe that, in case of stress, the company could defer investments to sustain liquidity. Maintaining adequate liquidity is key to the rating--particularly given that we need at least an adequate assessment to rate MIP higher than the sovereign. Cancelling dividends and upstreaming loans and investments could also sustain lower leverage and better debt coverage.
MIP's exposure to Turkey, which we regard as having a high-risk corporate environment, underpins the rating. MIP has all of its operations in Turkey. Therefore, we cap the foreign currency rating on MIP at the level of our 'BB-' T&C assessment on Turkey, despite the company's SACP of 'bbb-'. We rate MIP one notch above the 'B+' long-term foreign currency sovereign rating on Turkey, because we view MIP's stand-alone credit quality as higher than the sovereign rating. More importantly, our analysis of the company under our sovereign default stress test shows that it can repay its debt even if there is a foreign-currency-denominated sovereign debt default (see "Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions," published Nov. 19, 2013, on RatingsDirect). The test includes both economic stress and potential currency devaluation, and we have fine-tuned our assumptions on the company's revenue and applied more stringent debt costs/interest rates conditions to its financing costs. This translates into a 10% haircut on available cash on balance, combined with a 30% stress on the terminal's EBITDA. MIP passes our stress test following the issuance and the envisaged financing package because it meets our liquidity requirement--namely a ratio of sources to uses of 1x.
The stable outlook on MIP primarily reflects our stable outlook on Turkey. It also reflects our expectation that the company will maintain its relatively resilient operating and financial performance, as well as supportive financial flexibility. In light of significant planned capital expenditure (capex) and dividends, we expect its S&P Global Ratings-adjusted debt to EBITDA will be 2.5x-3.0x, with adjusted FFO to debt of 30%-35% on a three-year weighted-average basis. We consider these ratios to be commensurate with the 'bbb-' SACP.
We could lower the ratings if we took a negative sovereign rating action or if we revised down our 'BB-' T&C assessment for Turkey. We could also consider a downgrade if MIP's liquidity deteriorated in light of heavy cash distributions and/or capital investments over the next 12 months, which would likely pressure its liquidity profile and reduce its ability to pass our liquidity stress test. All else being equal, we could lower our rating on MIP if its SACP deteriorates to below 'bb-', but we view this as unlikely in the short-to-medium term. This could result from weaker liquidity, financial metrics, a deterioration of its business strengths, or a combination of both."
We could lower the SACP to 'bb+' with no effect on the overall rating--all else being equal--if FFO to debt deteriorated to below 30% and debt to EBITDA rose higher than 3x.
All else being equal, we could raise the rating on MIP if we revised upward our T&C assessment for Turkey (currently 'BB-'). Because MIP's business is highly exposed to country risk, the ratings are capped at the T&C on Turkey."